Access to Justice for Victims of the International Carbon Offset Industry

Kylie Wilson *

International carbon offset schemes allow industrialized countries and private entities to offset domestic greenhouse gas emissions by financing climate change mitigation projects in the developing world. Large multinational corporations profit from the sale of surplus credits and carbon derivatives on the international carbon market. The Clean Development Mechanism is a compliance-offset scheme established by the Kyoto Protocol and administered by the Clean Development Mechanism Executive Board. Despite the mechanism’s stated objective that projects contribute to sustainable development, corporate investors pursue low-cost emission reductions while imposing a range of environmental and socioeconomic costs on developing countries. Poorly implemented projects damage local biodiversity and displace vulnerable communities. In spite of these concerns, the parties to the Kyoto Protocol are currently considering the proposal for a Clean Development Mechanism appeals procedure. The proposal, if implemented in its current form, would favor project developers by allowing them to appeal adverse decisions of the Executive Board. This Article presents an empirical critique of the Clean Development Mechanism’s regulatory framework, focusing on access to information, public participation, environmental impact assessment, and access to justice. It argues for strengthened procedural requirements that would boost the mechanism’s contribution to sustainable development and would enable non-governmental organizations to adequately scrutinize projects. The parties to the Kyoto Protocol should also grant local stakeholders and non-governmental organizations standing to appeal the registration of projects and the issuance of carbon credits to the impending Clean Development Mechanism Appellate Body. Without such reforms, the United Nations will continue to subsidize the destruction of biological diversity and the

* B.Sc. L.L.B. (Hons.), 2010, Macquarie University, Sydney; Researcher to the Hon. Justice Brian J. Preston, Chief Judge of the Land and Environment Court of New South Wales. The author would like to thank Judith Preston for her insights and guidance during the research and drafting of this Article. Thanks also to Tim Stephens, Ilona Millar and Natalie Klein for their comments and advice, and to Gabrielle Cuskelly, Kristi Black, Nick Jimenez, Nate Johnson, Alex Bandza, and Tony Au of the Ecology Law Quarterly for their hard work.

967

2011] ACCESS TO JUSTICE IN THE CDM 969 economic growth. International emissions trading and carbon offset schemes

are attractive responses to climate change because they are seen as a “win-win” opportunity, enabling companies to abate their greenhouse gas emissions while

profiting from the generation and sale of carbon credits. 2

The Clean Development Mechanism (CDM) is one of three market-based mechanisms established by the Kyoto Protocol to the United Nations Framework Convention on Climate Change (Kyoto Protocol) that aim to reduce the cost of climate change mitigation to the global economy. It allows industrialized countries and private entities to finance projects in developing countries and then use Certified Emission Reductions (CER) accruing from projects to fulfill their emission reduction commitments or to trade on the

international carbon market. 3 The CDM is based on neoliberal logic, 4 but its current legal framework is the result of a tenuous compromise struck during the Kyoto negotiations. Its three stated objectives are: (1) to assist non-Annex I parties in achieving sustainable development, (2) to contribute to the ultimate objective of the United Nations Framework Convention on Climate Change (UNFCCC), and (3) to assist Annex I parties in achieving compliance with

their emission reduction commitments. 5

Ostensibly, the CDM stands out as one of the Kyoto Protocol’s greatest success stories. It is the first and only market-based, flexible mechanism to have channeled private capital to finance greenhouse gas emission reductions in

developing countries. 6 It has established a primary market in a regulatory commodity worth $7.4 billion in 2007, 7 which far exceeds the level of investment voluntarily contributed by governments. 8 The CDM has led to the generation of more than 800 million CERs, and is expected to generate a total

2 . Id. at 111. 3 . Kyoto Protocol to the United Nations Framework Convention on Climate Change art.

12(3)(b), Dec. 11, 1997, 2303 U.N.T.S. 148 [hereinafter Kyoto Protocol]. 4 . Emissions trading and carbon offsetting are forms of “neoliberal” or “market-based” environmental governance because the management of climate change is partly delegated to the market in an attempt to reduce greenhouse gas emissions more efficiently than under traditional forms of “command-and-control” regulation. See Adam Bumpus & Diana Liverman, Accumulation by

Decarbonization and the Governance of Carbon Offsets , 84 E CON . G EOGRAPHY 127, 145 (2008); David Driesen, Economic Instruments for Sustainable Development, in E NVIRONMENTAL L AW FOR S USTAINABILITY 277 (Benjamin Richardson & Stepan Wood eds., 2006); N EWELL & P ATERSON , supra note 1, at 23–25. 5 . Kyoto Protocol, supra note 3, art. 12(2). 6 . Christina Voigt, Responsibility for the Environmental Integrity of the CDM: Judicial Review

of Executive Board Decisions , in L EGAL A SPECTS OF C ARBON T RADING : K YOTO , C OPENHAGEN AND B EYOND 272, 273 (David Freestone & Charlotte Streck eds., 2009). 7 .K ARAN C APOOR & P HILIPPE A MBROSI ,W ORLD B ANK ,S TATE AND T RENDS OF THE C ARBON M ARKET 2008, at 2 (2008), available at http://siteresources.worldbank.org/NEWS/Resources/State& Trendsformatted06May10pm.pdf.

8 . In 2006, the Global Environment Facility received a mere $3.13 billion from thirty-two donor governments, which covered its entire operations between 2006 and 2010. GEF 4 Replenishment, G LOBAL E NVIRONMENT F ACILITY , http://www.thegef.org/gef/replenishment4 (last visited Jan. 16,

970 ECOLOGY LAW QUARTERLY [Vol. 38:967 of 2.7 billion CERs by the end of the Kyoto Protocol’s first commitment period

in 2012. 9 It has also spurred a vibrant derivatives market, which in 2010 was

worth $18.3 billion. 10 However, criticism of the environmental and economic performance of the CDM is mounting. From an environmental perspective, the CDM has been described as ineffective and unjust. Scientists have argued that the methods of calculating emission reductions are inherently flawed and easy to manipulate, resulting in the issuance of CERs that do not reflect actual emission

reductions. 11 The CDM has been criticized for enabling companies to prolong the use of fossil fuels rather than investing in the deployment of renewable energy technologies. 12 Indeed, the idea of offsetting does not come from environmentalists and climate scientists, “but from politicians and business executives trying to meet the demands for action while preserving the

commercial status quo.” 13

Critical scholars argue that the CDM is a product of the entrenched inequalities of global society and is “geared in the interests of international

capital.” 14 They say that the CDM shifts power from the state to corporations, thereby opening the door for a new form of “carbon colonialism” that will exacerbate existing environmental and social injustice. 15 These criticisms challenge the fundamental economic assumptions behind the use of market- based mechanisms at the global level, and suggest that even a reformed CDM

might not be able to achieve its objectives. 16 Despite such opposition, the economic success of the CDM has ensured that the mechanism will continue to

be an integral part of the post-2012 international climate change regime. 17 The

9 . CDM in Numbers , U. N. F RAMEWORK C ONVENTION ON C LIMATE C HANGE , http://cdm.unfccc. int/Statistics/index.html (last visited Jan. 3, 2012). 10 .N ICHOLAS L INACRE , A LEXANDRE K OSSOY & P HILIPPE A MBROSI , W ORLD B ANK , S TATE AND T RENDS OF THE C ARBON M ARKET 2011, at 9 (2011), available at http://siteresources.worldbank.org/ INTCARBONFINANCE/Resources/State_and_Trends_Updated_June_2011.pdf. 11 . Madhusree Mukerjee, A Mechanism of Hot Air, S CI . A M . June 2009, at 18; Quirin Schiermeier, Clean-Energy Credits Tarnished, 477 N ATURE 517, 517–18 (2011), available at http://www.nature.com/news/2011/110927/full/477517a.html. 12 . John Vidal, Rich Countries to Pay Energy Giants to Build New Coal-Fired Power Plants ,

G UARDIAN (London), July 14, 2010, at 22, available at http://www.guardian.co.uk/environment/ 2010/jul/14/un-carbon-offset-coal-plants. 13 . Nick Davies, The Inconvenient Truth About the Carbon Offset Industry ,G UARDIAN (London), June 16, 2007, at 14, available at http://www.guardian.co.uk/environment/2007/jun/16/climatechange. climatechange.

14 . Andriana Vlachou & Charalampos Konstantinidis, Climate Change: The Political Economy of

Kyoto Flexible Mechanisms , 42 R EV . R ADICAL P OL . E CON . 32, 41–45 (2010).

15 . Heidi Bachram, Climate Fraud and Carbon Colonialism: The New Trade in Greenhouse Gases , 15 C APITALISM N ATURE S OCIALISM

16 . Harro van Asselt & Joyeeta Gupta, Stretching Too Far? Developing Countries and the Role of

Flexibility Mechanisms Beyond Kyoto , 28 S TAN . E NVTL . L.J. 311, 315–16 (2009).

17. At the Seventh Session of the Conference of the Parties Serving as the Meeting of the Parties to the Kyoto Protocol (COP/MOP) in Durban, the COP/MOP decided that the second commitment period under the Kyoto Protocol would begin on January 1, 2013, and end either on December 31, 2017,

2011] ACCESS TO JUSTICE IN THE CDM 971 CDM will also serve as a model for emerging and future offset schemes,

including the Reducing Emissions from Deforestation and Forest Degradation mechanism. 18 From an economic perspective, project developers have complained of high transaction costs, increasing regulatory delays, and a lack of transparency and accountability in Executive Board decision making. According to the World Bank, these deficiencies have contributed to a sharp downturn in the

value of the CDM market, from $7.4 billion in 2007 to $1.5 billion in 2010. 19 The establishment of an independent CDM appeals process has been suggested as a means to strengthen the procedural “rights” of project developers and

create a more robust, transparent, and accountable system. 20 Project developers and carbon industry bodies such as the International Emissions Trading Association—which represents over 170 companies, including Goldman Sachs, Rio Tinto, BP, and Shell—have endorsed this recommendation and engaged in

successful lobbying for the establishment of a CDM appeals process. 21

The CDM draws competing criticisms regarding its economic and environmental performance because of the inherent tension between the stringent regulations necessary to ensure that projects deliver environmental benefits and the low-cost emission reductions demanded by project developers

and investors. 22 Efforts to improve environmental integrity through enhanced

United Nations Framework Convention on Climate Change, Conference of the Parties Serving as the Meeting of the Parties to the Kyoto Protocol on Its Seventh Session, Durban, S. Afr., Nov. 28–Dec. 9, 2011 , Outcome of the Work of the Ad Hoc Working Group on Further Commitments for Annex I Parties Under the Kyoto Protocol at Its Sixteenth Session , Draft decision -/CMP.7, ¶ 1 (advance unedited version), http://unfccc.int/files/meetings/durban_nov_2011/decisions/application/pdf/awgkp_outcome. pdf (last visited Jan. 4, 2012).

18 . United Nations Framework Convention on Climate Change, Report of the Conference of the Parties on Its Fifteenth Session, Copenhagen, Den., Dec. 7–19, 2009, Copenhagen Accord, dec. 2/CP.15, ¶ 6, U.N. Doc. FCCC/CP/2009/11/Add.1 (Mar. 30, 2010), available at http://unfccc.int/resource/ docs/2009/cop15/eng/11a01.pdf.

19 .A LEXANDRE K OSSOY & P HILIPPE A MBROSI ,W ORLD B ANK ,S TATE AND T RENDS OF THE C ARBON

M ARKET

2010, at 37–39 (2010), available at http://siteresources.worldbank.org/

INTCARBONFINANCE/Resources/State_and_Trends_of_the_Carbon_Market_2010_low_res.pdf;

L INACRE , K OSSOY & A MBROSI , supra note 10, at 9.

20 . See, e.g. , Moritz von Unger & Charlotte Streck, An Appellate Body for the Clean Development Mechanism: A Due Process Requirement ,3C ARBON & C LIMATE L. R EV . 31 (2009); Jolene Lin & Charlotte Streck, Mobilising Finance for Climate Change Mitigation: Private Sector Involvement in International Carbon Finance Mechanisms , 10 M ELB . J. I NT ’ L L. 70 (2009); Ilona Millar & Martijn Wilder, Enhanced Governance and Dispute Resolution for the CDM, 3 C ARBON & C LIMATE L. R EV . 43 (2009); Ludger Giesberts & Alexander Sarac, An Appeals Process for the Kyoto Protocol’s Clean

Development Mechanism ,4C ARBON & C LIMATE L. R EV . 260 (2010).

21 . See Our Members ,I NT ’ L E MISSIONS T RADING A SS ’ N , http://www.ieta.org/our-members (last visited Jan. 17, 2011); State of the CDM Market 2008: Facilitating a Smooth Transition into a Mature Environmental Financing Mechanism , I NT ’ L E MISSIONS T RADING A SS ’ N , 11 (2008), http://www. ieta.org/index.php?option=com_content&view=article&id=96%3Astate-of-the-cdm- 2008&catid=27%3Aarchived-reports&Itemid=93.

22 . Jacob Werksman, The “Legitimate Expectations” of Investors and the CDM: Balancing Public Goods and Private Rights Under the Climate Change Regime ,2C ARBON & C LIMATE L. R EV . 95,

972 ECOLOGY LAW QUARTERLY [Vol. 38:967 regulatory supervision increase transaction costs, while simplifying procedures

and deregulating the market compromise environmental goals. The current CDM regulatory framework purports to achieve the optimum balance between these competing goals by imposing five main requirements that a project developer must satisfy before the CDM Executive Board will register a project. First, project developers must demonstrate that their project will result in real, measurable, and long-term reductions in emissions that are in fact “additional”

to any that would occur in the absence of the mechanism. 23 Second, the project developer must obtain a letter of approval from the host country confirming that the project contributes to sustainable development. 24 Third, the project developer must invite comments from local stakeholders. 25 Fourth, the project

developer must conduct an environmental impact assessment (EIA), if required by the host country. 26 Finally, the project design document must be made publicly available on the UNFCCC website to receive comments from non- governmental organizations (NGO) and state parties to the Convention. 27 Despite these requirements, the Executive Board consistently approves projects that cause significant socioeconomic and environmental damage. Large hydropower projects inundate fertile agricultural land and displace forest

and farming communities. 28 Forestry projects pose a threat to native biodiversity and can disrupt local hydrological cycles, reducing the availability of water for indigenous people and local communities. 29 Some projects have even been associated with human rights abuses resulting from the forced removal of people from their land. 30 The international community has largely ignored these issues, instead focusing its attention on including new technologies within the CDM, removing barriers to investment and streamlining the approval process in order to attract more investment.

At the fifth session of the Conference of the Parties Serving as the Meeting of the Parties to the Kyoto Protocol (COP/MOP) in Copenhagen, the COP/MOP requested that the Executive Board draft procedures for appeals

23 . Kyoto Protocol, supra note 3, art. 12(5)(b)–(c). 24 . United Nations Framework Convention on Climate Change, Report of the Conference of the

Parties Serving as the Meeting of the Parties to the Kyoto Protocol, Montreal, Can., Nov. 28–Dec. 10, 2005, Modalities and Procedures for a Clean Development Mechanism As Defined in Article 12 of the Kyoto Protocol , dec. 3/CMP.1, ¶ 40(a), U.N. Doc. FCCC/KP/CMP/2005/8/Add.1 (Mar. 30, 2006), available at http://unfccc.int/resource/docs/2005/cmp1/eng/08a01.pdf [hereinafter Modalities and Procedures].

25 . Id. ¶ 37(b). 26 . Id. ¶ 37(c). 27 . Id. ¶ 40(c). 28 . John Vidal, Giant Dams Threaten Livelihoods of 300,000 Tribal People, G UARDIAN

(London), Aug. 9, 2010, at 18. 29 . Joyotee Smith, Afforestation and Reforestation in the Clean Development Mechanism of the Kyoto Protocol: Implications for Forests and Forest People ,2I NT ’ L J. G LOBAL E NVTL . I SSUES 322, 327–28 (2002). 30 . See, e.g. , U.N. Special Rapporteur Issues Report on Panama Dam, C ULTURAL S URVIVAL (May 21, 2009), http://www.culturalsurvival.org/news/panama/un-special-rapporteur-issues-report-

2011] ACCESS TO JUSTICE IN THE CDM 973 against its decisions. 31 This proposal has been discussed extensively from the

project developers’ perspective. 32 However, there has been only minimal exploration of whether or how such an appeals procedure could be used to strengthen the procedural rights of local stakeholders and hold CDM investors

liable for the adverse environmental and social impacts of projects. 33 This Article aims to challenge the one-sided dialogue surrounding the proposed CDM appeals process, and to substantiate the need to significantly strengthen the CDM’s procedural requirements and grant local stakeholders and NGOs standing to appeal decisions of the Executive Board. Such reforms will lead to greater consideration of the externalized costs associated with CDM projects, enhanced scrutiny by the general public and NGOs, increased pressure on investors to design and implement sustainable projects, and, ultimately, more equitable outcomes for local stakeholders.

Part I of this Article will outline the underlying neoliberal economic rationale of the CDM, its origins in the Kyoto Protocol negotiations, and its current regulatory framework. It will also briefly canvas the literature on the impending CDM appeals process. Part II examines the vexed issue of whether the CDM is fulfilling its goal of sustainable development. It focuses on whether the CDM’s legal framework satisfies the procedural aspects of sustainable development, namely access to information, public participation in decision making, EIA, and access to justice. Part II also critiques the existing CDM legal framework based on primary observations from project design documents and case studies of hydroelectric, forestry, and waste projects. The contrast between the rationale outlined in Part I and the analysis of projects in Part II serves to highlight the substantial gap between the initial ambitions and rhetoric surrounding the CDM and the reality of how CDM projects are implemented. Part III will explore the legal and normative bases for strengthening local stakeholders’ procedural rights and granting access to justice. It will then outline a set of recommendations to address the identified deficiencies in the CDM regulatory framework. Part III will also explore the political and practical limitations to reform and the broader implications of the ideas and arguments presented in this Article.

31 . United Nations Framework Convention on Climate Change, Report of the Conference of the Parties Serving as the Meeting of the Parties to the Kyoto Protocol on Its Fifth Session, Copenhagen, Den., Dec. 7–19, 2009, Further Guidance Relating to the Clean Development Mechanism, dec. 2/CMP.5, ¶ 42, U.N. Doc. FCCC/KP/CMP/2009/21/Add.1 (Mar. 30, 2010), available at http://unfccc.int/resource/docs/2009/cmp5/eng/21a01.pdf.

32 . See, e.g. , Lin & Streck, supra note 20; Millar & Wilder, supra note 20; Giesberts & Sarac, supra note 20.

974 ECOLOGY LAW QUARTERLY [Vol. 38:967

I. A N O VERVIEW OF C ARBON O FFSETTING AND THE C LEAN D EVELOPMENT M ECHANISM

A. The Theory and Origins of Offsetting

Climate change has been described as “a market failure on the greatest scale the world has seen.” 34 It is the result of the fact that commodities markets externalize the consequences of consumption and investment choices on the climate system. 35 The Pew Center on Global Climate Change recently pointed out that, “[i]n the absence of prices (costs) associated with environmental damages, producers and consumers need not account for such damages in their

activities and choices.” 36 This is a reiteration of Ronald Coase’s argument that the problem of the harmful effects of pollution would be solved if the “damaging business has to pay for all damage caused.” 37 Emissions trading is a neo-liberal economic policy that applies the Coase Theorem to the problem of climate change. Coase argued that the market could internalize the external social and environmental costs if policy makers and businesses conceptualize “factors of production” as rights to perform certain physical actions, such as the creation of smoke, noise, or greenhouse gas emissions, and not just physical

assets that businesses can acquire. 38 In the absence of transaction costs, it does not matter to whom rights to pollute are assigned because the market will modify the initial legal allocation of those rights through transactions to

achieve the most efficient outcome. 39 Businesses will weigh the cost of eliminating the harmful effects of pollution against the cost of purchasing the right to pollute. This will lead to the utilization of factors of production— including rights to pollute—where the value of the product yielded is greatest, thereby minimizing external social and environmental costs more efficiently

than under alternative systems of regulation. 40

Policymakers apply the Coase Theorem to the problem of climate change by placing a legal limit on greenhouse gas emissions and by assigning emission permits, allowances, or credits to participants in the scheme. Those who are able to reduce their emissions easily and cheaply will have surplus credits, which they can sell to those who have higher marginal abatement costs. By limiting the right to emit greenhouse gases and allowing individuals to trade those rights, the market places a price on carbon, which forces businesses to

34 .N ICHOLAS S TERN ,T HE E CONOMICS OF C LIMATE C HANGE : T HE S TERN R EVIEW 27 (2007). 35 . Id. 36 . Janet Peace & Robert Stavins, Meaningful and Cost Effective Climate Policy: The Case for

Cap and Trade , P EW C ENTER ON G LOBAL C LIMATE C HANGE , 1 (2010), http://www.pewclimate.org/ docUploads/case-for-cap-and-trade-paper.pdf.

37 . R. H. Coase, The Problem of Social Cost, 3 J.L. & E CON . 1, 2 (1960).

38 . Id. at 43–44. 39 . Id. at 15.

2011] ACCESS TO JUSTICE IN THE CDM 975 internalize the cost of their greenhouse gas emissions on the global

environment. 41 This encourages emitters to invest in low-carbon technologies

and consumers of greenhouse-gas intensive goods and services to change their

spending patterns in response to increasing costs. 42

The main advantage of emissions trading is that it leads to the employment of climate change mitigation efforts where the value of those efforts is greatest, and does so at a lower cost than under traditional command-and-control

regulation. 43 Because greenhouse gases are not contained by national borders, the supply of emission reductions can be generated anywhere to benefit the environment by reducing the overall global concentration of greenhouse gases. Thus, regardless of the initial allocation of responsibility, the fungibility of

emission reductions 44 enables the invisible hand of the market to direct

investment to wherever the cheapest reductions can be made. 45

Carbon reductions are like many other commodities in that they are often easier and cheaper to produce in the developing world, where industrial processes are generally less efficient, regulatory requirements are less onerous,

and raw materials, labor, and land are usually less expensive. 46 For example, in 1998, it was estimated that the cost of emission reductions in the United States was $125 per metric ton of carbon dioxide equivalent (CO 2 eq), compared to $14–23 per metric ton in the developing world. 47 This is because the relatively advanced stage of technological development in industrialized countries makes replacing or retrofitting existing energy infrastructure with cleaner technologies increasingly difficult. In other words, energy producers experience diminishing returns in terms of the quantity of greenhouse gas reductions for each dollar invested in cleaner technologies. In developing countries, where new energy capacity is needed but existing energy infrastructure is less efficient, new, lower-emitting energy facilities can be built to meet the burgeoning demand for energy while substantially reducing emissions. This means that the same level of investment can result in greater emission reductions in the developing world

41 .P ATRICIA B IRNIE , A LAN B OYLE & C ATHERINE R EDGWELL ,I NTERNATIONAL L AW AND THE E NVIRONMENT 364 (3d ed. 2009). 42 .S TERN , supra note 34, at 353. 43 . See Driesen, supra note 4, at 280. 44 . Each of the six greenhouse gasses listed in Annex A of the Kyoto Protocol are fully fungible.

The global warming potentials of each gas, as determined by the Intergovernmental Panel on Climate Change, are used to calculate the carbon dioxide equivalence of each gas so that each and every CER is

equal to one metric ton of carbon dioxide equivalent (CO 2 eq). I NTERGOVERNMENTAL P ANEL ON C LIMATE C HANGE , C LIMATE C HANGE 1995: T HE S CIENCE OF C LIMATE C HANGE 22 (1995), available at http://www.ipcc.ch/ipccreports/sar/wg_I/ipcc_sar_wg_I_full_report.pdf. 45 . Tom Tietenberg, The Tradable-Permits Approach to Protecting the Commons: Lessons for Climate Change , in C LIMATE -C HANGE P OLICY 167, 168 (Dieter Helm, ed. 2005). 46 . Bumpus & Liverman, supra note 4, at 133. 47 .L AVANYA R AJAMANI , D IFFERENTIAL T REATMENT IN I NTERNATIONAL E NVIRONMENTAL L AW

976 ECOLOGY LAW QUARTERLY [Vol. 38:967 than in the industrialized world. 48 Hence, the total cost of tackling climate

change can be lowered by reallocating investment to climate change mitigation

efforts in the developing world. 49

Despite these advantages, not all parties at the Kyoto negotiations supported market-based mechanisms to reduce the cost of climate change mitigation. The CDM resulted from negotiations that attempted to merge the United States-backed goal of market-based flexibility with Brazil’s original

proposal for a “clean development fund.” 50 Brazil argued that Annex I Parties who did not comply with the Kyoto Protocol should pay a financial penalty of $10 for every metric ton of CO 2 eq emitted in excess of their assigned

amount. 51 These fines were to fund climate change mitigation and adaptation

projects in developing countries. 52 The Group of 77 (G77) and China 53 endorsed this proposal as a means of enforcing compliance with Annex I Parties’ emission reduction commitments, while generating additional revenue

for development assistance. 54 However, the United States, which was only willing to accept modest emission reduction commitments in exchange for a liberal international emissions trading scheme, characterized the fund as a

“flexible financing instrument.” 55 The result was Article 12 of the Kyoto Protocol with its multiple objectives: (1) to assist non-Annex I parties in achieving sustainable development, (2) to contribute to the ultimate objective of the UNFCCC, and (3) to assist Annex I parties in achieving compliance with their emission reduction commitments. The European Union, along with the G77 and China, reluctantly accepted emissions trading and the CDM in the

hope of obtaining the United States’ ratification of the K yoto Protocol. 56

48 . Michael Wara, Measuring the Clean Development Mechanism’s Performance and Potential , 55 UCLA L. R EV . 1759, 1774 (2008). 49 .B IRNIE , B OYLE & R EDGWELL , supra note 41, at 364. 50 . Jacob Werksman, The Clean Development Mechanism: Unwrapping the ”Kyoto Surprise ,” 7 R EV . E UR . C OMMUNITY & I NT ’ L E NVTL . L. 147, 152 (1998); U.N. Framework Convention on Climate Change, Tracing the Origins of the Kyoto Protocol: An Article-by-Article Textual History, ¶¶ 349–56, U.N. Doc. FCCC/TP/2000/2 (Nov. 25, 2000) (by Joanna Depledge), available at http://unfccc.int/resource/docs/tp/tp0200.pdf.

51 . Werksman, supra note 50, at 151. 52 . Id. 53 . The G77 “is the largest negotiating coalition in the United Nations system.” The group was

originally established by seventy-seven signatories in 1964, but now has over 130 member states. It is the primary advocate of developing countries within the international climate change regime. China

remains an associate to the G77, rather than a full member. F ARHANA Y AMIN & J OANNA D EPLEDGE , T HE I NTERNATIONAL C LIMATE C HANGE R EGIME : A G UIDE TO R ULES , I NSTITUTIONS AND P ROCEDURES 34–35 (2004). 54 . Werksman, supra note 50, at 151. 55 . Id. at 151–52. 56 . David Driesen, Sustainable Development and Market Liberalism’s Shotgun Wedding:

2011] ACCESS TO JUSTICE IN THE CDM 977

B. The CDM’s Legal Framework

Since its inception, the CDM has come to be governed by a complex and dynamic body of legal text, which has evolved through incremental efforts of the COP/MOP and the Executive Board. 57 The following outline of the CDM’s legal framework provides the necessary background for evaluating its effectiveness in Part II of this Article.

All three of the Kyoto Protocol’s flexible mechanisms enable Annex I Parties to purchase or trade carbon credits. Each credit traded allows the purchaser to increase its emissions by one metric ton of CO 2 eq above its legal limit. However, unlike the Joint Implementation mechanism and emissions trading between Annex I Parties, 58 the two parties to a CDM transaction are not in competition. 59 Host countries do not have a cap on their emissions. Therefore, the creation of CERs does not entail an economic cost, but rather an economic gain. Indeed, because host countries tax CERs, the more CERs a

project generates, the more revenue the host country will receive. 60 The CDM market thus engages both host countries and investors who seek to maximize the number of CERs generated. 61 In this context, a robust regulatory framework for the registration of projects and issuance of CERs is imperative to the success of the CDM and the overall performance of the global carbon

market in achieving its environmental goals. 62

1. Institutions The CDM is subject to the authority and guidance of the COP/MOP and is

supervised by the Executive Board. 63 The COP/MOP formally adopted the

57 . Matthias Krey & Heike Santen, Trying to Catch Up with the Executive Board: Regulatory Decision-Making and Its Impact on CDM Performance , in L EGAL A SPECTS OF C ARBON T RADING :

K YOTO , C OPENHAGEN AND B EYOND 232, 232–34 (David Freestone & Charlotte Streck eds., 2009).

58 . Under Joint Implementation, both investor country and host country are Annex I Parties. Therefore, new credits cannot be created and issued. Instead, the host country must convert some of its Assigned Amount Units into Emission Reduction Units and transfer them to the investor country. In order to avoid transferring surplus units, host countries have a strong incentive to ensure that emission reductions achieved by a project are real and verifiable. Kyoto Protocol, supra note 3, art. 6(1); see Jelmer Hoogzaad & Charlotte Streck, A Mechanism with a Bright Future: Joint Implementation, in

L EGAL A SPECTS OF I MPLEMENTING THE K YOTO P ROTOCOL M ECHANISMS : M AKING K YOTO W ORK 176 (David Freestone & Charlotte Streck eds., 2005). 59 . Ernestine Meijer & Jacob Werksman, Keeping It Clean – Safeguarding the Environmental Integrity of the Clean Development Mechanism , in L EGAL A SPECTS OF I MPLEMENTING THE K YOTO P ROTOCOL M ECHANISMS : M AKING K YOTO W ORK 191, 193 (David Freestone & Charlotte Streck eds., 2005). 60 . See, e.g. , Measures for Operation and Management of Clean Development Mechanism Projects in China , D EPARTMENT OF C LIMATE C HANGE , N ATIONAL D EVELOPMENT AND R EFORM C OMMISSION , art. 24 (Nov. 21, 2005), http://cdm.ccchina.gov.cn/english/NewsInfo.asp?NewsId=905. 61 . Axel Michaelowa, Interpreting Additionality of CDM Projects: Changes in Additionality Definitions and Regulatory Practices over Time , in L EGAL A SPECTS OF C ARBON T RADING : K YOTO ,

C OPENHAGEN AND B EYOND 248, 248–49 (David Freestone & Charlotte Streck eds., 2009).

62 . Voigt, supra note 6, at 274.

978 ECOLOGY LAW QUARTERLY [Vol. 38:967 CDM Modalities and Procedures, which govern the CDM project cycle, at its

first meeting in 2005. The COP/MOP and the Executive Board continually amend and supplement these procedures. The Executive Board is also responsible for reviewing and registering projects, issuing CERs, accrediting and suspending designated operational entities, and developing a publicly available repository of rules, procedures, methodologies, guidelines and

standards that it applies in reviewing projects and issuing CERs. 64 The Executive Board has established six specialized panels to assist in the performance of its functions, including the Accreditation Panel and the

Registration and Issuance Team. 65 The Executive Board consists of ten members nominated by the relevant constituencies and elected by the COP/MOP. 66 Members are required to “[p]ossess appropriate technical and/or policy expertise” and to act in their personal capacity. 67 They must not have a pecuniary interest in any CDM project or designated operational entity. 68 While the Executive Board often conducts reviews of projects, the responsibility of determining the eligibility of proposed projects lies primarily

with private auditors, known as designated operational entities. 69 Project developers contract designated operational entities to validate a proposed

project or verify and certify emission reductions. 70 The Executive Board accredits entities on the basis of accreditation standards in the CDM Modalities and Procedures, and the COP/MOP is responsible for an entity’s final

designation as a designated operational entity. 71 If a designated operational entity ceases to meet accreditation standards, the COP/MOP may suspend or withdraw the entity’s accreditation. 72 The COP/MOP may also require a designated operational entity to purchase and cancel CERs if significant deficiencies are identified in any of the entity’s reports. 73 The majority of the steps in the project cycle, as shown in Figure 1, are conducted by designated operational entities who decide, based on information provided by the project developer, whether or not to validate a project or certify CERs. The entity’s decision is final unless the Executive Board opts to conduct a review of the

64 . Modalities and Procedures, supra note 24, ¶ 5; see also Rules and Reference, U.N. F RAMEWORK C ONVENTION ON C LIMATE C HANGE , http://cdm.unfccc.int/Reference/index.html (last visited Jan. 17, 2011). 65 . Modalities and Procedures, supra note 24, ¶ 18; Governance, U.N. F RAMEWORK C ONVENTION ON C LIMATE C HANGE , http://cdm.unfccc.int/EB/governance.html (last visited Oct. 22, 2011). 66 . Modalities and Procedures, supra note 24, ¶¶ 7–8(a). 67 . Id. ¶ 8 (c). 68 . Id. ¶ 8 (e)–(f).

69. Tyson Dyck, Enforcing Environmental Integrity: Emissions Auditing and the Extended Arm of

the Clean Development Mechanism , 36 C OLUM . J. E NVTL . L. 259, 261 (2011).

70 . List of DOEs , U.N. F RAMEWORK C ONVENTION ON C LIMATE C HANGE , http://cdm.unfccc.int/ DOE/list/index.html (last visited Jan. 17, 2011). 71 . Modalities and Procedures, supra note 24, ¶ 20. 72 . Id. ¶ 21.

2011] ACCESS TO JUSTICE IN THE CDM 979 project. 74 However, designated operational entities face unavoidable conflicts

of interest because they contract directly with the project developer and therefore have an incentive to act in the project developer’s interest. 75 It has been suggested that the costs of conducting the verification should be included in the CDM project application fees paid to the UNFCCC Secretariat. This way, the Executive Board could contract directly with designated operational entities, who would then have the incentive to disclose as much information as

possible to the Executive Board and not to act in the developer’s interest. 76

74 . Rolf Weber, Regulation and Financial Intermediation in the Kyoto Protocol’s Clean

Development Mechanism , 22 G EO . I NT ’ L E NVTL . L. R EV . 271, 277 (2010).

75 . Wara, supra note 48, at 1799.

980 ECOLOGY LAW QUARTERLY [Vol. 38:967

2. The Project Cycle

Figure 1: The CDM Project Cycle

Before a developer can submit a project to the Executive Board for registration, the developer must prepare a project design document, which contains a description of the project, the methodology used for calculating the baseline from which emission reductions will be measured, and the

2011] ACCESS TO JUSTICE IN THE CDM 981 methodologies to be used for data collection and monitoring. 77 The project

design document must also demonstrate that the project will reduce emissions below those that would have occurred in the absence of the CDM project. 78 This project eligibility requirement, called the “additionality” criterion, is designed to ensure that CDM projects create emission reductions that are “additional to” any emission reductions that would have occurred if the CDM

did not exist. 79 This means that the CDM operates as a subsidy by providing

additional revenue, in the form of CERs, needed to make certain emission reduction projects financially viable. 80 If projects do not demonstrate additionality to a high degree of certainty, the integrity of the CDM will be undermined because it will be issuing credits for reductions that would have

been made anyway, resulting in a net global increase in emissions. 81

In preparing the project design document, the project developer must invite comments from local stakeholders. The project design document must contain a summary of the comments received, and state how those comments

were taken into account. 82 The term “stakeholders” is defined broadly to mean “the public, including individuals, groups or communities affected, or likely to

be affected” by the proposed project. 83

The project design document must also describe the environmental impacts of the project. If the project participants or the host country considers those impacts to be significant, the project developer must undertake an EIA in

accordance with the host country’s procedures. 84 Project developers must obtain written approval from the Designated National Authorities of the host country and the relevant Annex I country. The host country’s letter of approval must attest to the project’s contribution to their country’s sustainable

development. 85 The project developer must then contract with a designated operational entity to validate the project. The entity reviews the project design document to confirm that the project is in full compliance with the CDM Modalities and

Procedures and any other applicable standards or guidelines. 86 The designated operational entity must publish the project design document on the internet for thirty days in order to receive comments from state parties, stakeholders, and

77 . Modalities and Procedures, supra note 24, app. B, ¶ 2(a)–(b), (h). 78 . Id. ¶ 2(d). 79 . Kyoto Protocol, supra note 3, art. 12(5)(c); see Michaelowa, supra note 61, at 248–49.

80 . Wara, supra note 48, at 1764; Michaelowa, supra note 61, at 249; Y DA S CHREUDER , T HE

C ORPORATE G REENHOUSE : C LIMATE C HANGE P OLICY IN A G LOBALIZING W ORLD 171 (2009).

81 . Meijer & Werksman, supra note 59, at 193. 82 . Modalities and Procedures, supra note 24, ¶ 37(b). 83 . Id. ¶ 1(e). 84 . Id. ¶ 37(c). 85 . Id. ¶ 40(a).

982 ECOLOGY LAW QUARTERLY [Vol. 38:967 UNFCCC accredited NGOs. 87 The designated operational entity then

determines whether, on the basis of the information provided by the project developer and taking into account the comments received, the project should be

validated. 88 Once the validation report is complete, the designated operational entity submits a request for registration to the Secretariat, who conducts a completeness check and publishes the request for registration on the internet. 89 The Executive Board registers the project unless a state party involved in the project or at least three members of the Executive Board request a review of the project within twenty-eight days of the publication of the request for

registration. 90 During a review, the Review and Issuance Team and the Secretariat undertake independent technical assessments of the project and recommend either the registration or rejection of the project. 91 If both assessments result in the same recommendation, it automatically becomes the Executive Board’s final decision after twenty days. 92 If the assessments result in two different recommendations or if a member of the Executive Board disagrees with the recommendation, the Executive Board considers the project at its next

meeting. 93 If a project is rejected, the reasons for the decision must be communicated to the project developer and the public. 94

Once the project is underway, the project developer must prepare a monitoring report and a second designated operational entity must verify and certify the estimated emission reductions. 95 This designated operational entity determines whether the monitoring report is in accordance with the requirements of the registered project design document, and whether the methodologies for the estimation of emission reductions have been applied

correctly. 96 The designated operational entity then certifies in writing that the

87 . Id. ¶¶ 27(h), 40(b)–(c); United Nations Framework Convention on Climate Change, Clean Development Mechanism Executive Board, Procedures for Processing and Reporting on Validation of CDM Project Activities, ¶¶ 3, 5(g), 10, 13, EB 50 Rep., Annex 48 (Oct. 16, 2009), available at http://cdm.unfccc.int/Reference/Procedures/valid_proc02.pdf.

88 . Modalities and Procedures, supra note 24 ¶ 40(d). 89 . United Nations Framework Convention on Climate Change, Clean Development Mechanism

Executive Board, Procedure for Requests for Registration of Proposed CDM Project Activities, ¶¶ 4, 12, 16, EB 59 Rep., Annex 12 (Feb. 18, 2011), available at http://cdm.unfccc.int/UserManagement/ FileStorage/1DZKI7NAS8BV34P6F5Q0U9MJTHGYCX. 90 . Id. ¶¶ 17, 19, 23–24. 91 . United Nations Framework Convention on Climate Change, Clean Development Mechanism

Executive Board, Procedures for Review of Requests for Registration, ¶¶ 12–15, EB 55 Rep., Annex 40 (July 30, 2010), available at http://cdm.unfccc.int/UserManagement/FileStorage/ CJTO27K6DXIUN0LHZ3A9F4P1GM8WEV.

92 . Id. ¶ 20. 93 . Id. ¶ 22. 94 . See id. ¶ 27. 95 . Modalities and Procedures, supra note 24, ¶ 60.

2011] ACCESS TO JUSTICE IN THE CDM 983 project has achieved the verified quantity of emission reductions. 97 Both the

verification and certification reports are submitted to the Secretariat, who conducts a completeness check and publishes the request for issuance of

CERs. 98 The Executive Board issues the requested number of CERs, unless an involved state party or at least three members of the Executive Board request a review of the proposed issuance within twenty-eight days of the publication of

the request. 99

C. The Impending CDM Appeals Process

The carbon offset industry has expressed dissatisfaction with regulatory delays in the CDM project cycle, which are said to have resulted in high transaction costs, losses in CER volumes, and low market values for CERs. 100 Project developers are concerned that the Executive Board reviews almost every project and that a considerable proportion of projects submitted for registration are not registered within the official timeline. 101 However, since the CDM became operational the Executive Board has rejected only 5.3 percent of all projects requesting registration, 102 and some scholars have identified a “culture of approval” within the Executive Board. 103 Despite this high rate of approval, the Executive Board has repeatedly been accused of making arbitrary and non-transparent decisions. 104 Between October 2006 and August 2007, the Secretariat received twelve unsolicited letters from companies expressing dissatisfaction with the rejection of projects. 105 Some stated that as a result of the decisions of the Executive Board, their companies suffered losses amounting to “several million Euros,” as well as “damage to their reputation

97 . Id. ¶ 63. 98 . United Nations Framework Convention on Climate Change, Clean Development Mechanism

Executive Board, Procedure for Requests of Issuance of CERs, ¶¶ 9–13, EB 54 Rep., Annex 35 (May 28, 2010), available at http://cdm.unfccc.int/Reference/Procedures/iss_proc09.pdf. 99 . Id. ¶¶ 14, 16. 100 .K ARAN C APOOR & P HILIPPE A MBROSI ,W ORLD B ANK , S TATE AND T RENDS OF THE C ARBON M ARKET

2009, at 45 (May 2009), available at http://siteresources.worldbank.org/ EXTCARBONFINANCE/Resources/State_and_Trends_of_the_Carbon_Market_2009-FINALb.pdf. 101 . Krey & Santen, supra note 57, at 231, 242; I NT ’ L E MISSIONS T RADING A SS ’ N , S TATE OF THE CDM 2010: F OCUSING ON E FFICIENCY 3 (2010), http://www.ieta.org/assets/Reports/ieta-the-state-of-the- cdm-2010.pdf. 102 . The statistic is based on the author’s calculation of the number of rejected projects as a percentage of the total number of projects submitted for registration as of January 2011. See CDM Project Activities, U.N. F RAMEWORK C ONVENTION ON C LIMATE C HANGE , http://cdm.unfccc.int/ Projects/index.html (last visited Jan. 17, 2011). 103 . See Meijer & Werksman, supra note 59, at 205. 104 . David Stanway, Spurned Chinese Developers Blast UN CO 2 Rulings ,R EUTERS (Aug. 6, 2010 9:10 AM), http://www.reuters.com/article/idUSTRE6751BC20100806. 105 . United Nations Framework Convention on Climate Change, Conference of the Parties Serving as the Meeting of the Parties to the Kyoto Protocol, Third Session, Bali, Indon., Dec. 3–14, 2007, Privileges and Immunities for Individuals Serving on Constituted Bodies under the Kyoto Protocol: Implementation of Decision 9/CMP.2 , ¶ 10, U.N. Doc. FCCC/KP/CMP/2007/2 (Nov. 13, 2007),

984 ECOLOGY LAW QUARTERLY [Vol. 38:967 due to negative publicity.” 106 The main concerns raised in the letters were that

the Executive Board failed to follow the review procedures specified in the CDM Modalities and Procedures, that the Executive Board violated “principles of due process,” that there was a lack of transparency in the interpretation and application of the Modalities and Procedures, and that there was inconsistency in the decisions concerning similar projects. 107

These claims arise because of the unique way in which the Executive Board, a public international body, directly regulates private entities participating in the CDM. Generally, treaties only contain obligations that member states have agreed to fulfill. States then chose to implement their treaty obligations domestically by regulating the actions of private entities. The domestic laws of each country govern any disputes that arise between national administrative bodies and private entities. 108

Most international review or dispute settlement proceedings, such as the International Court of Justice, can only be initiated by States. 109 Recently, the Gold Standard Foundation, a non-profit organization that operates as a premium quality certification scheme for carbon offsets, proposed an appeals procedure that will provide project developers with the option to challenge adverse decisions of the Gold Standard Foundation in the Permanent Court of International Arbitration. 110 However, because the Foundation is a private entity, proceedings would arise from the contractual relationship between the project developer and the Foundation, and would be submitted to the Permanent Court of International Arbitration pursuant to an arbitration clause. 111 By contrast, all situations in which private entities wish to challenge Executive Board decisions involve purported rights and obligations born out of the CDM Modalities and Procedures, and not rights created by private contractual agreement. 112 Thus, designated operational entities cannot challenge an Executive Board decision to suspend or withdraw accreditation, nor do project developers have recourse when the Executive Board rejects a project or declines to issue CERs. This novel arrangement also poses questions of how local stakeholders can adequately participate in the CDM’s decision- making processes and how they can challenge the registration of projects.

106 . Id. ¶ 11. 107 . Id. ¶ 13.

108 . See I AN B ROWNLIE , P RINCIPLES OF P UBLIC I NTERNATIONAL L AW 31–32 (7th ed. 2008). 109 . Statute of the International Court of Justice art. 34, ¶ 1, June 26, 1945, 55 Stat. 1055. 110 . Press Release, The Gold Standard Found., The Gold Standard Foundation Releases Proposed

Appeals Procedure (July 19, 2010), http://www.cdmgoldstandard.org/fileadmin/editors/files/2_news/ press-releases/Press_Release_Appeals_Body.pdf.

111 . See T HE G OLD S TANDARD F OUND ., D RAFT R ULES FOR A PPEALS ON R EGISTRATION , I SSUANCE

Access to Justice for Victims of the International Carbon Offset Industry